Pricing. The demand schedule is (Price of 12-pack) and assumes that Coke and Pepsi are perfect substitutes for the consumer.

Profitability. The annual accounting profit (in millions of dollars) is given by total revenue minus total cost. For Coke, the variable cost of producing one 12-pack is $2. The annual fixed cost for the Coke corporation is $750 million. For Pepsi, we believe that the variable cost of producing one 12- pack is $2. The annual fixed cost for the Pepsi corporation is $500 million.

(1) What happens to the price of both Coke (C) and Pepsi (S) products when the quantity supplied of either drink rises? Explain in one sentence why this happens by referring to what you know about consumer demand.

(2) Graph the Coke and Pepsi strategy schedules on a single graph. What is special about the quantities where the two schedules intersect? Explain in no more than two sentences.

(3) What are Coke and Pepsi profits at the quantities where these two curves intersect? Show your calculations. What is the price P of 12-packs at those quantities?

(4) Your study of the pricing rule above has suggested to you that reducing the quantity supplied will make both corporations better off by raising the price per 12-pack sold. Take the example of C = 1000 and S = 1000. What will happen to P if we choose those quantities? What are the profits of the two corporations if Coke and Pepsi were to produce that amount? Now redo the exercise for C = 800 and S=800. Show your calculations.

(5) What is the quantity that you have for Coke in your strategy list if Pepsi produces 800 million 12- packs? Is that different from the C = 800 million 12-packs we considered in question (4)? Compare the profit to Cokes best response to S = 800 million to the profit you reported for C=800 in question (4): what accounts for the difference? Explain.

Your compilation of the thoughts of Coke managers (in millions of 12-packs per year) \begin{tabular}{|l|l} \hline If Pepsi's choice is ... & Coke's response is ... \end{tabular} Derived from a Survey of Pepsi management What is Pepsi's best response? A survey of the Pepsi management. \begin{tabular}{|r|r|r|r|} \hline & (in millions of 12-packs per year) \\ \hline & & \\ \hline If Coke's choice is ... & \\ \hline 100 & & Pepsi's response is \\ \hline 200 & & 1300 \\ \hline 300 & & 1250 \\ \hline 400 & & 1200 \\ \hline 500 & & 1150 \\ \hline 600 & & 1100 \\ \hline 700 & & 1050 \\ \hline 800 & & 1000 \\ \hline 900 & & 950 \\ \hline 1000 & 900 \\ \hline 1100 & & 850 \\ \hline 1200 & & 800 \\ \hline 1300 & & 750 \\ \hline 1400 & & 700 \\ \hline 1500 & & 650 \\ \hline 1600 & & 600 \\ \hline 1700 & & 550 \\ \hline 1800 & & 500 \\ \hline 1900 & & \\ \hline 2000 & & \\ \hline \end{tabular} Your compilation of the thoughts of Coke managers (in millions of 12-packs per year) \begin{tabular}{|l|l} \hline If Pepsi's choice is ... & Coke's response is ... \end{tabular} Derived from a Survey of Pepsi management What is Pepsi's best response? A survey of the Pepsi management. \begin{tabular}{|r|r|r|r|} \hline & (in millions of 12-packs per year) \\ \hline & & \\ \hline If Coke's choice is ... & \\ \hline 100 & & Pepsi's response is \\ \hline 200 & & 1300 \\ \hline 300 & & 1250 \\ \hline 400 & & 1200 \\ \hline 500 & & 1150 \\ \hline 600 & & 1100 \\ \hline 700 & & 1050 \\ \hline 800 & & 1000 \\ \hline 900 & & 950 \\ \hline 1000 & 900 \\ \hline 1100 & & 850 \\ \hline 1200 & & 800 \\ \hline 1300 & & 750 \\ \hline 1400 & & 700 \\ \hline 1500 & & 650 \\ \hline 1600 & & 600 \\ \hline 1700 & & 550 \\ \hline 1800 & & 500 \\ \hline 1900 & & \\ \hline 2000 & & \\ \hline \end{tabular}